10 Pros and Cons of Refinancing Your Student Loans
Looking to save money on interest or pay off your student loans faster? It might make sense to refinance. Learn about the pros and cons before you decide.
If you want to save on interest costs, refinancing to a private student loan can be a beneficial way to go about it. If you’ve been wondering whether this move makes sense for you, it’s important to understand how refinancing student loans works as well as the pros and cons.
Pros and Cons of Refinancing Student Loans
Refinancing a student loan means you take out a new loan to pay off an existing loan. You’ll then pay off the new loan, which tends to have different rates and terms than the previous loan.
As with all financial decisions, there are advantages and disadvantages to refinancing.
Pros of Student Loan Refinancing
You Can Save a Significant Amount on Interest Charges
If you have a student loan with a high interest rate, refinancing to a lower rate can result in thousands of dollars (or more) in savings throughout the life of the loan. Think about what you could do with those savings.
When you refinance, it will be to a private student loan. You can shop around and find the most competitive rates and terms for your financial profile. If you have steady income and a good credit history, you could qualify for a lower rate.
For instance, if your current loan amount is $25,000 with a 15-year term and an interest rate of 12%, you’ll pay $29,008.21 in total interest. If you refinance to a new loan with the same term but a 7% interest rate, you’ll pay $15,446.87 in interest, a difference of $13,561.34
You Can Lower Your Monthly Payment
If you find it hard to afford your current monthly payment, refinancing your student loan could result in a lower monthly payment. In addition to potentially securing a better interest rate, you can refinance to a different term. Depending on the private lender, you may be able to refinance to a longer student loan repayment term, resulting in lower monthly student loan payments.
Keep in mind that if you do that, you’ll probably pay more interest over time. If you refinance to a loan with no prepayment penalty, however, you can make extra payments to help speed up your debt-free timeline.
You Can Simplify the Debt Payoff Process
You may be paying off several student loans at once, which can feel overwhelming and complicated. You can refinance and consolidate multiple loans into one, making the payoff process easier because you’ll need to keep on top of only one loan payment.
You Can Release a Co-signer
You may have borrowed with a co-signer to increase your chances of qualifying for a loan or securing a good rate. Unfortunately, not all loans allow you to release your co-signer, even if you’ve been responsible with your repayment, but you might be able to remove your co-signer by refinancing to a loan in your name.
Increase Your Chances of Paying Off Your Loan Faster
If you refinance to a shorter term, you can pay off your loan faster. With a shorter term come higher monthly payments, however, so make sure you can comfortably afford them before refinancing to a shorter term.
Alternatively, you can refinance to a lower rate with the same term and use the savings to make extra payments, assuming the loan doesn’t have a prepayment penalty. That way, you have some flexibility with regard to your payment amount.
You Don’t Have to Worry About Rates Rising
If you have a variable-rate loan, your interest rate can fluctuate over time in response to market changes. That means your monthly payment could go up over time because of rising interest rates. Refinancing to a fixed-rate loan means you can feel more confident knowing you’ll have predictable monthly payments.
Cons of Student Loan Refinancing
You May Not Qualify for a Lower Rate
While the main draw of refinancing student loans is to lock in a lower interest rate, you may not qualify for one, especially if your credit score is less than stellar. Or you may qualify for a slightly lower interest rate but have to pay loan application or origination fees, negating any savings.
That’s why it’s important to check your credit history before you refinance and shop around to see what you may qualify for to determine whether refinancing is worth it. If refinancing isn’t a good option for you, you could consider alternatives such as making extra payments or waiting until your credit score is better before trying again.
You Could Be Locked Into a Repayment Plan
When you refinance, you’re locked into a loan term and rate for the life of the new loan. While it isn’t a major downside, you could find over time that the loan you refinanced isn’t a great fit. In that case, you’re stuck with the loan until you pay it off or refinance again.
You May Take More Time to Pay Off Your Loan
Yes, you can lower your monthly payments by refinancing to a longer term loan, but that means it’ll take you longer to pay off your debt. You also could be paying more in interest over time, which may hinder your current or future financial goals.
You Lose Federal Student Loan Benefits
Federal student loans come with protections and benefits from the U.S. Department of Education that private loans don’t. These include repayment options like income-based repayment plans and student loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF). You’ll also lose access to deferment and forbearance programs from the federal government. If you are taking advantage of these benefits now or may want to do so in the future, think carefully about refinancing federal student debt.
Should You Refinance?
While refinancing your student loan debt does offer many advantages, it isn’t for everyone. Make sure you weigh your options and consider the potential financial consequences before you proceed.
If you decide refinancing is right for you, consider joining Juno today. Juno negotiates with partner lenders on behalf of borrowers to help students qualify for the best refinance rates possible given their financial situations.
Sarah Li Cain
Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where she and her guests have deep and honest conversations about money affects their well-being.
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